Tax Planning Strategies for Startups
Written by Aparna Devalla
Curated by Rubric Financial
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Entity Structure and Tax Implications
- C-Corporations are the standard for VC-backed startups and are taxed at a flat 21% federal rate, with shareholders taxed again on dividends (double taxation), but this structure is required by most institutional investors.
- S-Corporations pass income through to shareholders and avoid double taxation, but have restrictions on the number and type of shareholders that make them incompatible with venture capital financing.
- LLCs offer flexibility in tax treatment (can elect to be taxed as a sole proprietorship, partnership, S-Corp, or C-Corp) and are common for bootstrapped companies and holding structures.
- Converting from an LLC to a C-Corp before fundraising is a common path. Plan the conversion carefully to avoid unintended tax consequences from the change in entity type.
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About the author
Aparna DevallaCPAHead of Tax & Accounting
CPA and Head of Tax & Accounting at StartupCFO. Specializes in multi-state tax compliance, R&D credits, and GAAP-compliant books for venture-backed startups.
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